Oil shipping by rail: Tank car demand rises at breakneck speed

By early 2015, thousands of newly minted, gleaming crude tank cars will leave the sheds of manufacturers such as Trinity Industries Inc., Union Tank Car Co. and Greenbrier Co. to carry rising North American crude production, offering some relief to the choked North American oil pipelines.

On any given week, three to seven CP Rail trains laden with crude oil from the North Dakota Bakken field whisk across North America, bypassing the pipeline bottlenecks in mid-continent that are depressing oil prices and unaffected by the noise in Washington, D.C., that is holding back the Keystone XL pipeline.

It’s a roaring business. In 2009, when Calgary-based Canadian Pacific Railway Ltd. started dabbling in crude oil transportation, it moved 500 of its black barrel-shaped cars out of the basin. Last year, its oil trains carried 13,000 cars and soon CP could be moving 70,000 cars or more a year out of the North Dakota Bakken tight-oil field alone.

“The tank car backlog is close to 48,000, and perhaps as many as 30,000 are related to crude petroleum,” said Toby Kolstad, who runs advisory firm Rail Theory Forecasts.

The number of tank cars ordered for shipping crude and expected to be delivered by the end of 2014 will be enough to move two million barrels of oil per day, almost three times what is currently extracted from the Bakken shale basin, Mr. Kolstad said.

That’s the size of two Keystone XLs and one Seaway pipeline.

As much as 40% of the orders are from Canadian entities desperate to get their crude out of Western Canada and into U.S. refineries in the East and on the Gulf Coast.

Mr. Kolstad’s forecasts are broadly in line with other industry estimates.

“Recently the tank car order backlog was estimated at more than 45,000 cars, which includes a considerable number of cars for crude oil service,” said Doug Reece, business development manager at Procor, an Oakville, Ont.-based affiliate of Union Tank Car.

There has been a shortage of cars ever since crude on rail picked up

Rapid take-up of crude-via-rail means capacity constraints are catching up with the railway business as well — similar to their pipeline counterparts.

Industry estimates shows as much as 4% of total Canadian crude is being shipped via rail and analysts think the industry is just getting started, as more than a $1-billion has been rolled out in expanding rail infrastructure.

“There has been a shortage of cars ever since crude on rail picked up,” Jean-Jacques Ruest, chief marketing officer at Canadian National Railway Co. said in a recent TV interview. “There will be a shortage of cars in 2013; there will probably be a shortage of cars in 2014. After that we will see.”

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Rival Canadian Pacific Railway Ltd. says both the energy and rail industries are working to resolve the issue.

“One thing to note is that there were existing fleets of tank cars prior to the surge in crude shipments, but in light of the continuing growth, rail car capacity is currently being built up quite rapidly,” said a CP spokesman. “So, right now, it is something that is being worked on and monitored very closely by both industries.”

Investors like Carl Icahn and Warren Buffett have long seen the opportunity coming and are well-positioned in the business.

Mr. Icahn disclosed a 9.9% stake in Greenbrier last November and is keen to merge the Lake Oswego, Ore.-based operator with American Railcar Industries Inc., another major train manufacturer in which he has a 56% stake.

Mr. Buffett has a controlling stake in Union Tank Car, and has emerged as a major beneficiary of the crude-via-rail boom as the owner of BNSF Railway Co. — one of North America’s largest railway companies. BNSF reportedly earned US$272-million from crude shipments alone in 2012.

This is a dramatic turnaround for train manufacturers that never thought they would see another growth spurt in their industry. Instead, they have been scrambling to supply new crude tank cars to Canadian and U.S. crude producers.

“I had not expected to see another car cycle in my railroad career; three were enough and I thought that the dip in railcar production after the Great Recession was the last I would have to forecast,” said Mr. Kolstad, who has followed the industry for more than two decades.

The high demand for tank cars means an 18-month waiting period is common, said Jack Isselmann, director of corporate relations at Greenbrier.

“Our orders in 2012 were seven times larger than 2011,” Mr. Isselmann said in an interview. However, he thinks a shortage is unlikely.

“There are obviously fleet management solutions that can be brought to bear to accommodate the pressure that’s on new rail cars. It is accurate to say that all manufacturers will be moving aggressively and rapidly to respond to new rail car demand.”

Pipeline companies’ inability to push through regulations and opposition to shipping Alberta bitumen to refineries across North America has allowed railway companies, tank-car makers, barge operators and a whole host of other transportation sectors to build a tidy revenue stream based on crude.

Some of the producers appreciate the benefits of crude by rail, and will stick to crude by rail, even if the pipeline capacity is online

Greenbrier added a new tank-car line in Monclova in Mexico, which will double its production capacity, and is taking orders for 2015 as crude producers and refiners put their faith in the rail business.

“Our view is that some of the producers appreciate the benefits of crude by rail, and will stick to crude by rail, even if the pipeline capacity is online,” said Mr. Isselmann.

Mr. Reece says a number of studies have addressed the ramifications of new pipeline takeaway capacity and “this is certainly a concern.”

“Rail cars are long-term assets. However, there are other traffic opportunities given rail’s flexibility in terms of origins and destinations, and other benefits. Rail can complement pipelines in supply chains.”

“I don’t know when the peak will be reached in the crude by rail, but it may be soon; new areas [shale deposits] may take the tank cars made redundant by the Keystone XL pipeline,” said Mr. Kolstad.

With rising demand for tank cars is there room for a new manufacturer, perhaps in Canada?

Unlikely.

Tank-car manufacturing has become a concentrated business over the years and there are major barriers to entry for new players.

“There are four major manufacturers of tank cars in North America, serving the market with high-volume facilities,” said Mr. Reece. “Facilities must be certified by the Association of American Railroads (AAR), and new cars must be built to AAR approved drawings. In addition to the physical plant, there are considerable tank-car engineering requirements.”